The Fed’s Interest Rate Hike, The Stock Market, and Their Effects on Real Estate
With the Federal Reserve’s announcement that the central bank will raise interest rates for the first time in nearly a decade just hours ago, much has been already been made of the impending changes to the economy against the backdrop of a stock market that, while still bullish, is nonetheless unseasonably volatile as energy stocks have deteriorated, energy firms downgraded, and a massive junk bond selloff. With liquidity already markedly decreased in the wake of Dodd-Frank, some market observers expect a significant correction in the near future. For your IRA, this may not be the biggest deal; however, if you’re looking for investment opportunities in the stock market at this point, now may not be the best time to jump in, nor are stocks the most reliable investment vehicle at the moment.
Given some of these developments and what they mean for the market over the long term, real estate has become a wise investment for those who want to save for retirement or advance their financial positions. For one thing, as we’ve discussed before, investing in real estate provides a unique amount of leverage and builds the equity of the investor as they hold the asset. For another, current market conditions have precipitated low interest rates (discouraging saving, meaning consumers are more likely to spend on or invest in tangible assets), low inflation (meaning consumers have more disposable income and are thus encouraged to become homeowners), and increasing rent prices, meaning that the real estate market is continually appreciating in value, which is advantageous for the real estate investor whether they intent to flip the property or rent it out.
As most of us note with a certain measure of relief, oil prices are at their lowest in a decade, which translates to cheaper prices at the pump for consumers. While that’s good news for drivers and ultimately a boon to the economy since it increases the amount of disposable income at consumers’ disposal for use elsewhere, it’s caused a considerable amount of upset for the stock market, particularly for those who were heavily invested in energy stocks – which have been dropping in value as quickly as the price of oil – and those who invest in oil futures as a hedge against inflation. This means two things: the resulting volatility in the market means stocks aren’t as safe an investment as usual and drives investors to more tangible assets like real estate – thereby increasing the value of it – and consumers are more likely to consider buying homes as their monthly expenses decrease, particularly those related to travel.
Speaking of lower monthly expenses for consumers and their increased propensity to take risks like buying a home, the low-to-moderate inflation that the economy currently experiences means that consumers are cut yet another break in addition to cheaper fuel prices. While some staples such as food have a higher price increase than other goods, by and large the inflation rate is stable and gives consumers confidence when buying big-ticket items such as property and increases the demand for what you, as a real estate investor, have to offer.
Hiring has also picked up as unemployment continues to trend downward, and after nearly a decade wages are starting to increase, meaning Main Street is finally starting to feel the effects of recovery after wages remained mostly stagnant ever since 2008. As competition for employees begins to tighten for employers, the resulting higher wages and increased leverage held by workers again translates into increase consumer confidence. As a real estate investor, you’re in a very good position to take advantage of the potential influx of new prospective homebuyers.
Despite low inflation, rent prices have increased at a higher rate than other prices, and this is great news for investors in more than a few ways. For one, increasing rents invariably drives local real estate markets’ values higher. This means that if you were to buy and hold a property and rent it out, you could be reasonably assured that the overall value of both the property and the market would continue to appreciate if the trend continues to hold. On the flip side (no pun intended), higher rents mean that consumers are less willing to rent and more amenable to the idea of purchasing a property because it makes better financial sense for them; they may pay around the same amount per month on a mortgage as they would in rent, but if rent isn’t cheaper, the usual sentiment on the part of consumers is that they may as well build equity as they own their home. For the investor looking to fix and flip, this provides a considerable advantage.
No one yet knows how the Fed’s rate hike is going to affect the economy as a whole. While we knew low rates couldn’t last forever, neither is it a good idea to raise rates too soon if the economy is still on life support, as we saw by the ECB’s mistake in raising the interest rates of the EU too soon with disastrous consequences. The American economy is undeniably in better shape, however, and comparisons to the EU are largely apples to oranges. That said, the markets are likely going to roil in the next few weeks in the wake of the rate hike announcement, but real estate is largely expected to remain stable, and may even appreciate in value at an even higher rate as investors flee junk bonds and flock to tangible assets.
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